Home > companies > Kotak Realty to raise $250 million fund

Bengaluru: Kotak Realty Fund, part of the Kotak Mahindra Group, is planning to raise a $250 million (around 1,525 crore) fund, which will invest mainly in affordable housing projects.

Kotak’s last residential fund had invested through so-called structured finance, which uses a mix of debt and equity. However, the new fund will primarily do equity-centric deals in a high-risk, high-return model, a top fund executive said. The capital will be raised from wealthy domestic individuals.

“With our experience, we are in a position to judge risks better and so, we have decided to do an equity fund where we will share the risks and rewards with the developer in a transaction," said S. Sriniwasan, chief executive officer of Kotak Realty Fund. “With several funds in the market, there is competition and downward pressure on interest rates in debt financing. Why would I take all the risk for 14-15% low return?"

Many private equity funds which made pure equity investments during the 2005-07 boom were unable to return money to investors as the real estate market tanked soon after. After this, funds adopted debt financing, or structured deals involving both equity and debt. Kotak’s new fund marks a departure from this cautious route.

Kotak’s $392 million offshore fund in 2013-14 had included a commitment of around $200 million from sovereign wealth fund Abu Dhabi Investment Authority.

With home sales caught in a slowdown, the sweet spot for homebuyers in most cities remain in the 40-80 lakh segment. In line with the huge demand for homes in this category, Kotak’s new fund will also back projects with homes priced at 30-40 lakh and above.

2015 is also set to be a year of robust fund-raising, with a number of funds looking to raise nearly $1.5 billion in the first half. However, funds may find it tougher and take longer to raise this capital, Mint reported on 15 January.

Besides home-grown funds, there is a clutch of international funds part of the big real estate investment space.

“There is some amount of money in the domestic market. However, there are funds who have been around for the last eight-nine years and know the previous cycle and have learnt from it, unlike new, international funds who have come in now and who don’t seem to have the memory of what we have gone through," added Sriniwasan.

Fund managers are, however, hopeful that the well-heeled in India will flock to real estate as sales pick up and cash flows begin.

In January, IIFL Ltd launched a 1,000 crore residential fund, which includes a 750 crore target corpus and an additional 250 crore as a co-investment option for its wealthy loyal investors on a project-to-project basis. IIFL Real Estate Fund (Domestic) Series II will focus on debt-centric transactions and is a five- year fund.

“There is competition with so many funds, but investors are likely to look for a credible track record," said Saurabh Gupta, a fund manager at IIFL.

Earlier this month, Indiabulls Asset Management Co. Ltd (Indiabulls AMC) also launched its first real estate fund. The 500 crore real estate fund that includes the option of raising an additional 500 crore is a debt fund that will invest in residential projects.

“While the market sentiment may not be great, the group’s expertise is in real estate, financing and distribution and we are positive about this," said Akshay Gupta, group executive head, Indiabulls AMC. “We hope to achieve the first close of 100 crore by March."

“Real estate sales environment is not great, but with an out-of-turn interest rate reduction and with the economy on a growth trajectory, we are hoping that by end of this year, it will be favourable for home-buyers," said Chintan Patel, partner, transactions and restructuring, real estate and hospitality, at KPMG India.

As interest rates go further down and the sector picks up momentum, real estate will again become a good investment option for investors, he said.

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